Written by A.J. Brown

Will the Trend Ever Be Our Friend Again?

trend_scaledI’ve collaborated with my mentors, my peers and dedicated members of the Trading Trainer community about my findings in this post, so please read it carefully.

I’ve been asked recently, more than once, about when our directional strategies will become as reliable as they once were when they were returning profits over 100% ROIC.

Of course, those of you that have been following my blog posts and Trading Trainer for some time probably know already what my knee jerk reaction to that question will always be.  That is, we’ll know when the trend is once again our friend when the charts tell us so.

So, let’s take a moment and dissect what “milestones” I am looking for in the charts before I would feel 100% confident in our directional trend following strategies.

At this point, I do have to mention that over the past month, I have indeed traded validated and confirmed trend following templates with in-the-money far-out-in-time options and seen returns as high as 113% with average returns above 40%.

But, I’m still using a trailing stop loss strategy from the minute I open my position to lock in profits and exit at the first sign of a reversal.  The use of this “nimble” type exit from the get go is a testament to my current lack of confidence in trend followers.

First things first.  Because we know that bulls generally like to climb stairs and bears typically like to jump out of windows, I’m going to stick by my guns when I say I’ll be the most confident in our trend following templates only if the major indexes are moving up.

Speaking of the major indexes, those are what I am looking at to judge the broad market, and more importantly I am looking to the major indexes to determine when the trend will again be our friend.

Now, here are the baby steps I am looking for in the DOW:

  1. The DOW to close above $8,315.07, completing the retracement started on February 9th, 2009.
  2. The DOW’s 50 day SMA to clearly trend up.
  3. The DOW to close up above $9,000.
  4. The DOW to close up above its 200 day SMA.

And, the NASDAQ:

  1. The NASDAQ to close up above its 200 day SMA.

And, the S&P 500:

  1. The S&P 500 to close above $875.01, completing the retracement started on February 9th, 2009.
  2. The S&P 500 to close up above $920.
  3. The S&P 500 to close up above its 200 day SMA.

And, other miscellaneous milestones:

  1. The S&P 100 chart leading our major indexes in daily and weekly gains.
  2. Most importantly to me, the VIX dropping below 25.

Now, realize, that this is not an on-off switch.  As I mentioned earlier in this post, directional trend following plays are already panning out for investors (not just me).  As each milestone is reached, I’ll be building more confidence in the trend being our friend again.  But it won’t be until all of them are met that I might believe the trend is my friend again.

With you knowing all my thoughts as of right now, I want to share with you a screen cast I found interesting.  In it, Adam from Ino shows his interpretation of what the S&P 500 chart was telling him back on April 14th (10 trading days ago).

Please note his use of the MACD indicator and his long and short term trend indicators.  His long and short term trend indicators match closely the indicators we produce daily for our Trading Trainer member site members.  Adam’s screen cast demonstrates an interesting perspective. Definitely worth taking 7 minutes to watch it now…

==>  Click Here To Watch Adam’s Video Now

Please, after reading this post and perhaps watching Adam’s screen cast, comment below with your thoughts.  What are you looking for before you jump on board with directional trend following strategies?  I’m interested in what you can add.  Thanks!

Best regards always.

A.J. Brown

3 Responses to “Will the Trend Ever Be Our Friend Again?”

  1. Alan Ellman @ 5:59 pm:

    A.J.,

    Two points I’d like to make to corroborate Adam’s assessment of a market downturn:

    1- Previous recessions have shown a technical picture with 3 distinct bottoms. We have had two so far. Could the third be right around the corner?

    2- The March uptrend that Adam alluded to was explained by Duncan Niederauer, the chief executive of NYSE Euronext in an interview with the Financial Times. He felt the rally was driven by short-term traders taking advantage of market volatility and concentraded in just a handful stocks. The “real money” held by institutional investors is still on the sidelines and won’t be released until these players are convinced about the stability of market fundamentals. He predicted a summer rally in June/July.

    This gives us both technical and fundamental reasons to invest with extreme caution and possibly favor I-T-M strikes.

    My best to all,
    Alan

    • 
  2. Paulius @ 11:10 pm:

    Thanks for informative, specific and clear post.

    • 
  3. retinal camera @ 4:37 am:

    Important info and thanks for posting. Adding your blog to my rss feeder. Rainey

    • 

Leave a Reply




Video: Covered Call Writing  

Learn How to Write Covered Calls

In this series of 6 videos, I show you how to execute my covered call writing strategy from start to finish. Watch the first video instantly when you click for more information. Click for more »